ABSTRACT
The present study endeavours to examine the validity of Wagner’s law in Nigeria over the period of 1970_ 2015. Specifically, the study investigated the link between government expenditure and economic growth in Nigeria using ordinary least square econometric technique and in addition tested the Wagner’s law using Pairwise Granger causality test. The empirical findings revealed that Capital expenditure had a positive significant effect on economic growth while Recurrent expenditure on the other hand had an insignificant positive effect on economic growth in Nigeria. The result further showed that there is a bi – directional causality between government expenditure and economic growth implying that in Nigeria both Wagner’s law of increasing state activities ( increase in gross domestic product increases public expenditure ) and Keynesian hypothesis holds true for Nigeria.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Countries all over the world make efforts to achieve their macroeconomic goals through their fiscal and monetary policies. The impact of public expenditure in realizing these fiscal policy goals of pursuing economic growth, equity in income distribution and maintaining macroeconomic stability have emerged as one of the great issues in recent years. Developed economies and developing nations have been faced with an increasing size of government activities and its effect (impact) on economic growth has become an emerging debate. However, the over-riding growth in government spending (expenditure) appears to be a universal phenomenon applying to most countries of the world regardless of their level of economic advancement. Public expenditure is a fundamental instrument that influences the sustainability of public finance via effects on fiscal balances and government debts. Moreover, public expenditure can also pursue other goals, including employment, output and redistribution of income which can contribute to economic well being . Although the financing of government expenditure can be growing in general , the provision of social and physical infrastructures through these government spending (financing of government expenditure) can enhance and improve productivity through a more efficient and effective allocation of resources (Abu &Abdullahi,2010).
Consequently, public spending and economic growth have been at the focus of public finance, since the magnitude of public expenditure has been increasing over time in almost all the countries of the world. It is therefore necessary for governments to know the causal relationship between the two. Theoretically, there are two competing school of thought defining this causal relationship. First, Wagner (1883) postulated that public expenditure is an endogenous variable and that there exist long-run tendencies for public expenditure to grow relatively to some national income aggregates such as the Gross Domestic Product (GDP). Hence, public spending is a consequence rather than cause of national income. In other words, the causality between public expenditure and national income runs from national income to public expenditure. Therefore, Wagner’s law viewed that public expenditure plays no role in generating national income.
Government expenditure remains an important demand management tool and, if well-managed, it could put an economy on a long-term sustainable growth and development trajectory. Prudent government spending, through an efficient allocation of its resources to the different sectors of the economy, translates into an inclusive and sustainable growth pattern, which serves as a driver for eradicating poverty and inequality within society. The pattern of government expenditure in Nigeria over the years has to a large extent been driven by crude oil endowment, which is reflected in the generated revenue (Akanbi, 2014).
Second, Keynes regards public expenditures as an exogenous factor which can be utilized as a policy instruments to promote economic growth. From the Keynesian thought, public expenditure can contribute positively to economic growth. Hence, an increase in the government consumption is likely to lead to an increase in employment, profitability and investment though multiplier effects on aggregate demand. As a result, government expenditure augments the aggregate demand, which provokes an increased output depending on expenditure multipliers (Chude, & Chude, 2013).
Thus, wager’s law originally states that as population of a country increase, government activities increase intensively and extensively as a result of an increase in government spending. This simply implies that government expenditure is a function of increasing population growth. The policy implication of the whole scenarios is that an effective and working policy has to be employed first, to control the growing population rate in order to check mate the excessive increase of government spending. Wagner was the first person to model a relationship between government expenditure and economic growth of a country. He argued that government expenditure is an endogenous factor, which is determined by the growth of national income. (Wagner 1890). This view is popularly known as Wagner’s law in the empirical literature.
Following the political independence in 1960, the successive government of Nigeria started undertaking the primary responsibility of building capital and infrastructural base with the mind-set of promoting economic growth and social well being of the entire population (people). This led government to increase its spending on social and hold fare activities. The outcomes of these activities also have manifested in many human development indicators in Nigeria. In 1980s also, government expenditure in Nigeria increased, although not as rapid as in the 1970s. This was possible as a result of the military intervention in 1985 to resuscitate the economy from the shocks of oil price collapse. According to Aregbenyen (2006), the federal government expenditure every five years, which cut across 1985 and 2003 in Nigeria, increased at an average of 28.35 percent.
1.2 STATEMENT OF THE PROBLEM
Since independence in 1960, government expenditure has been on the increase side except around late 1970s and 80s when there was a sharp decline in oil price, however, it has been observed that even with the increase in government expenditure, it never reflected on the increase in national income. Public expenditure experience an upsurge in the last three decades and its ratio to GDP reached peaks of 20.4% in 1972, 29.5% in 1976, 30.2% in 1980, 23.5% in 1986, 22.5% in 1990, 34.2% in 1993, 29.7% in 1999 and 21.5% in 2001. During the period of 1970 – 2012, public expenditure was on average 18.7 percent of GDP, lowest at 10.4 % in 2006 and highest at 34.2% in 1993.
Also, there has equally been increase in unemployment rate in the country. This scenario should not be like that in real sense, as the increase in government expenditure should affect positively, the economic activities of the country thereby reducing the rate of unemployment in the country.
Government expenditure, as a matter of fact should be a vital instrument to help the country’s goal of reducing poverty, increasing the pace of economic growth and development and provide some boost for the ongoing reforms and National Economic Empowerment and Development strategy (NEEDS) and Millennium Development Goals (MDG). Despite the government spending (expenditure), Nigeria has no evidence of accelerating pace in the growth and development of the country. Rather, all we see is the signal of economic stagnation characterized by double digit inflationary trend, unemployment trend and set back in economic growth and development.
Therefore, this study is carried out to investigate whether there is a long-run relationship between government expenditure and economic growth.
1.3 OBJECTIVES OF THE STUDY
This study is geared towards exploring and discussing the theoretical and the empirical significance of Wagner’s hypothesis in Nigeria as a panacea to economic growth. The study intend to achieve the following objectives
- To determine whether there is a long-run relationship between government expenditure and national income.
- To determine whether Wagner’s law hold for Nigeria.
- To identify the direction of the casualty between government expenditure and national income.
1.4 RESEARCH QUESTIONS
The following research questions were stated to guide this study:
- Is there a long-run relationship between government expenditure and economic growth?
- Does government expenditure lead to economic growth in Nigeria?
- Does Wagner’s law hold for Nigeria?
1.5 RESEARCH HYPOTHESES
The following research hypotheses were formulated to guide this study:
Hypothesis 1
H0: There is no long-run relationship between government expenditure and national income.
H1: There is a long-run relationship between government expenditure and national income.
Hypothesis 2
H0: The direction of causality does not run from national income to government expenditure.
H1: The direction of causality runs from national income government expenditure.
Hypothesis 3
H0: Wagner’s law does not hold for Nigeria.
H1: Wagner’s law holds for Nigeria
1.6 SIGNIFICANCE OF THE STUDY
Any study on how to promote economic growth and development is of great important to the government and the society in general as well as individuals. This analysis is important as it would evaluate to what extent government expenditure (Wagner’s Law) has led to economic growth in Nigeria.
The findings of this work will be resourceful to policy makers like the Federal Ministry of Finance. The government and policy makers would find this research work handy as it will improve the quality of their insight, especially in the area of policy formulation in expenditure and in developing better theories on public expenditure growth in Nigeria for an improved performance of micro and macroeconomics.
It will also proffer recommendations to government in development planning, as it will unveil and reveal the direction of the causal relationship between national income and government expenditure. Students of economics and other related fields will also find this research work useful as it will increase the volume of their literature on this aspect of the study as well as serve as a guide to their research work.
Finally, the general public will also find this study of great value as it will serve as a reference material to them.
1.7 SCOPE/LIMITATION OF THE STUDY
This study shall focus on the investigation and examination of the theoretical and empirical validity of Wagner’s law in Nigeria as necessitated by the unproductive and insignificance of government spending on Nigeria economic growth. Therefore, it is also necessary to test the validity of Wagner’s law in Nigeria. The application of Wagner’s law in Nigeria shall be investigated empirically with data spanning from 1970 to 2015. The choice of the period of reference is vital because government spending is a matter of serious policy consideration.
The paucity of data placed heavy limitation to this research work. The insufficiency of related materials has also posed limitation to this work. Inadequate finance to meet all educational requirements was also a limitation to study, as it involves a considerable cost both implicit and explicit which become a serious constraint to the research considering the huge amount of money involved coupled with the fact that the researcher is only a student who has no savings presently. Also, the dearth of journals posses are restriction on this work. Another limitation to the study is short time factor which did not give time for thorough research work, hence gathering adequate information becomes very difficult.
1.8 DEFINITION OF TERMS
- a) Public Expenditure: Public expenditure is spending made by the government of a country on collective needs and wants such as pension, provision, infrastructure, etc. Until the 19th century, public expenditure was limited as laissez faire philosophies believed that money left in private hands could bring better returns.
- b) Wagner’s Law: Wagner’s law, also known as the law of increasing state spending, is a principle named after the German economist Adolph Wagner (1835–1917).
- c) Economic Growth: This is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another.
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